Canadian real estate owners in their not-so-golden years are on a borrowing spree. Office of the Superintendent of Financial Institutions (OSFI) filings show reverse mortgage credit reached a new record high in May. The annual pace of growth showed deceleration, but it was still a huge month for growth.
Reverse Mortgages
Reverse mortgages are a way for cash poor, house rich Boomers to tap the equity they have in their home. They can elect to receive a lump sum or regular payments, drawing down equity they’ve built over the years. It’s kind of like a home equity line of credit (HELOC), but the rates are higher and you don’t have to make a payment. The loan can be repaid, but is generally only due on death, default, or sale. Seniors that don’t have cash but hate the thought of downsizing are flocking to these loans.
Math whizzes can already see the issue with higher rates and no payments. If you’re not making payments, the interest can rack up quickly. This can lead to spending a lot more of your equity than you may have expected. The issue becomes more complicated if you borrowed at peak prices. The falling value of equity now comes exclusively from you, while the debt remains.
Canadians Owe Over $3.71 Billion In Reverse Mortgage Debt
The balance of reverse mortgage debt reached a new record high. Filings show reverse mortgage debt reached $3.72 billion in May, up 1.58% from last year. This represents a 27.63% increase compared to the same month last year. There’s some deceleration of growth on a year-over-year basis. However, reverse mortgages are still one of the fastest growing segments of debt.
Canadian Reverse Mortgage Debt
The total of reverse mortgage debt held by regulated finacial instituitions, in Canadian dollars.
Source: Regulatory Filings, Better Dwelling.
Reverse Mortgage Debt Makes Second Biggest Jump In 7 Years
Deceleration, schmeleration. Reverse mortgage debt is still growing very, very quickly. In May, the monthly increase works out to over $57.92 million in a single month. The 1.58% monthly gain for the month is the third largest increase for the month in the past seven years. The 12-month change is the second largest for May over that time period as well.
Canadian Reverse Mortgage Debt Change
The annual percent change of reverse mortgage debt held by regulated finacial instituitions.
Source: Regulatory Filings, Better Dwelling.
The new record for reverse mortgage debt isn’t surprising, but the growth rate is huge. High interest rates with a lack of payments means the balance is expected to grow. That’s before you factor in the high cost of living, and aging demographics of Canada. Even so, at this rate the balance would double in growth every three years. Huge growth may be a bit of an understatement.
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Reverse mortgage debt doubling every three years is such a Canadian problem. Real estate always goes up, so it’s not a problem right?
It’s actually such a Boomer problem. “I didn’t diversify, and I don’t want to move, so I’m going to draw down my equity until I die, leaving my kids with nothing, but at least I didn’t have to live in a condo.”
This is going to be the only generation to leave their kids less than any previous generations. That says a lot about the mindset they’re harboring.
What? Those west side Vancouver boomers whose $80,000 house is now worth $4,500,000 can very happily draw down a few hundred thousand and still leave their kids with millions.
Same is true all over Toronto as well. The boomers have amassed staggering wealth.
As long as the global rich are still eager to buy Canadian real estate, there won’t be a problem. On the other hand, if the sale of Canadian houses required payment from Canadian incomes … then there would be a huge problem.
Those same Boomers can’t even afford their tax bills.
Remarkable to think $57 million in spending in May was seniors withdrawing cash.
About 1% of retail sales, but I wouldn’t be surprised if a good portion was used to fund more real estate purchases.
They don’t have to worry about the debt, because interest rates will be slashed again. It’ll push real estate prices much higher from here.
If rates are being slashed, it’s not a good thing. The last cut was only to boost exports and help the oil industry, not because of an actual recession. If/when they make a rate cut, it’ll be because things are so bad we *need* stimulus. When those conditions hit, there won’t be a boost to home buying conditions, it will be because people are worried about losing their job.
Cutting rates is inevitable, and going to create the global bubble conditions needed to increase risk to levels where the issues can’t be mitigated. Canada doesn’t have the personal savings rate to really send prices higher.
https://www.forbes.com/sites/panosmourdoukoutas/2019/08/04/easy-money-wont-save-the-global-economy-from-the-next-recession/
Sammie really has no idea what he is talking about. We are at the end of a credit cycle. The cuts were already made in 2008-2009 and that money already poured into housing. Since 2017 credit is being taken out of the economy in the form of B20 and the Bank of Canada raising rates etc. Once that rate tightening cycle is over and they start lowering rates it isn’t a sign we are off to the races again. It means a recession is coming. We usually have them every 6-8 years so we are WAY overdue and this one will cut much deeper and longer than 2008-2009 because we never really had one. The last real recession we had was in the early 90’s. The only thing that will help is rapid wage gains which ain’t happening in this environment.
Lot of elderly immigrant families I know have obtained 500 k , 600k mortgages by putting down as the down payment all the cash (150, 200 K) brought here by selling their assets overseas and submitting falsified income documents. They are paying mortgages by doing 2-3 minimal wage jobs and could this go for ever at their age. I also hear that they continue to buy houses for their children and grand children
Current turmoil in HK may temporarily pop up the housing.